The Luxembourg government today resigned, brought down by a spying and corruption scandal that shook the tiny country better known for wealthy bankers than political intrigue.

Jean-Claude Juncker, prime minister since 1995 and the European Union's longest serving government chief, tendered his resignation to Grand Duke Henri, the royal head of state who himself has been implicated in media reports of espionage.

The government was forced to resign after junior coalition partners withdrew their support in protest at Juncker's apparent failure to rein in a secret service spiralling out of control. Juncker has proposed holding a general election in October, seven months ahead of schedule.

Accused: Grand Duke Henri (left) was implicated in espionage reports that led to the downfall of Juncker (right)

The catalyst for the resignation was a parliamentary inquiry published last week that said Luxembourg's security agency illegally bugged politicians and members of the public, purchased cars for private use and took payments and favours in exchange for access to influential officials.

In a scene reminiscent of a spy novel, former security chief Marco Mille recorded a conversation with Juncker in 2008 using a microphone in his watch.

Mille told Juncker he had reliable reports that Grand Duke Henri was in constant contact with Britain's secret services, according to one newspaper. The Grand Duke's office has denied the allegation.

The government was already under pressure due to renewed interest in a mysterious series of sabotage bomb attacks in the 1980s, known as the Bommeleeer affair, whose targets included electricity pylons and an airport radar system as well as a newspaper office.

Two former members of a special police force went on trial for the attacks at the start of this year.

Last month, the government and Finance Minister Luc Frieden survived twin votes of no-confidence in parliament over accusations that the minister had put pressure on investigators to close their inquiry into the bombings.

Juncker, for almost two decades the personification of Luxembourg on the international stage, chairing "Eurogroup" meetings of euro zone finance ministers from 2005 to 2013, may well return to lead the Grand Duchy after the snap election.

He remains a popular figure and has no obvious successor in his centre-right CSV party, particularly as the former finance minister has been tarnished, according to Philippe Poirier, politics lecturer at the University of Luxembourg.

Frieden, once touted as a possible future prime minister, has also come under fire over the re-purchase of a stake in Cargolux from Qatar Airways in January and European Union pressure to end Luxembourg's system of bank secrecy.

"The CSV crown price for many years, Luc Frieden, is himself involved in the telephone tapping and Bommeleeer affairs," Poirier said.

"Jean Claude Juncker is the electoral locomotive of his party. It's not the CSV, it's the Juncker party."